“ERISA Fiduciary Largest Undisclosed Risk I’ve Seen in My Career”

Another Excellent Article By David Chase

Employer/union provided health benefits likely represent over two-thirds of industry profits as they wildly overpay for healthcare services due to the misperception that PPOs help save them money. In reality, PPO networks cost employers/unions dearly.

Increased outside scrutiny on how ERISA-regulated health plans spend their dollars could create immense potential liability for both company directors and health insurers across the country.

Emerging Litigation Could be the Savior to Our Dysfunctional Healthcare System. Here’s how.

ERISA, the Employee Retirement Income Security Act, has been around since the Ford administration. Most people know the law in relation to retirement benefits, but it’s emerging as an unexpected, yet high-potential, opportunity to drive change in the dysfunctional U.S. healthcare system. The quote in the headline was stated at an event Dave attended on Payment Integrity (i.e., fraud prevention) attended by Big Four Risk Management practice leaders, a former HHS secretary and leaders of some of the most successful litigation firms in U.S. history.

About the co-author: Sean Schantzen was previously a securities attorney involved in representing boards, directors, officers, and companies in securities litigation and other matters including some of the largest securities cases in U.S. history.

The law sets fiduciary standards for using funds for self-insured health plans, which is how more than 100 million Americans receive health benefits. Health plans for wise companies with more than 100 employees are self-funded because they are generally less costly to administer. As a result, over $1 trillion in annual healthcare spending is under ERISA plans or out-of-pocket by ERISA plan participants, and the amount spent on ERISA health plans is roughly double the amount spent on ERISA retirement plans. While roughly one-third of healthcare spending, employer/union provided health benefits likely represent over two-thirds of industry profits as they wildly overpay for healthcare services due to the misperception that PPOs help save them money. In reality, PPO networks cost employers/unions dearly.

This makes ERISA plans an attractive target for operational efficiencies. Healthcare is the last major bucket of operational expenses that most companies haven’t actively optimized (they’ve already optimized their operations, sales, marketing, etc). For those that don’t get on top of this, it could also be a source of significant potential liability for companies and plan trustees.

ERISA requires plan trustees to prudently manage health plan assets. Yet very few plans have the functional equivalent of an ERISA retirement plan administrator that actively manages and drives effective allocation of plan investments. This person or team would have deep actuarial and healthcare expertise to enable them to deeply understand and negotiate potential high-cost areas of care, something traditional human resource departments lack.

At the same time, it’s broadly estimated that there is enormous waste throughout the system. The Economist has reported that fraudulent healthcare claims alone consume $272 billion of spending each year across both private plans and public programs like Medicare and Medicaid. The Institute of Medicine conducted a study on waste in the U.S. healthcare system and concluded that $750 billion, or 25% of all spending, is waste. PwC went so far as to say that more than half of all spending adds no value. It’s impossible to imagine any CEO/board allowing this in any other area of their companies.

Increased outside scrutiny on how ERISA-regulated health plans spend their dollars could create immense potential liability for both company directors and health insurers across the country. Nationally prominent lawyers, auditors, and others are catching on to this and taking action to get ahead of it or are advancing potential new categories of litigation that could result in hundreds of billions in damages.

In just the last couple of months, we at the Health Rosetta Institute, a nonprofit focused on scaling adoption of practical, nonpartisan fixes to our healthcare system, have learned of some key events that will likely further increase scrutiny on ERISA fiduciary duties.

Big Four accounting firms have refused to sign off on audits that don’t have allowances for ERISA fiduciary risk

First, two Big Four accounting firms have refused to sign off on audits that don’t have allowances for ERISA fiduciary risk. A senior risk management practice leader at one of those firms told a room of healthcare entrepreneurs and experts that ERISA fiduciary risk was the largest undisclosed risk they’d seen in their career. As more accounting firms start to require this, it will change how employers manage ERISA health plan dollars.

Second, independent board directors have quietly sounded the alarm to three company auditors about this growing issue, recognizing the potential potential for personal financial liability that director and officer insurance policies may not cover. We expect to see more of them focusing on this issue, given that healthcare spending is roughly 20% of payroll spending for most companies.

Third, attorneys are building litigation strategies around employers filing suits against their ERISA plan co-trustees, the plan administrators who actively manage the plan’s health dollars, alleging that they breached their ERISA fiduciary duties by turning a blind eye to fraudulent claims. We expect the first of these cases to be brought this year and significantly more in the next couple years. One firm we’re aware of is working on cultivating dozens of these cases.

The implications of this third trend could be enormous. If boards and plan trustees know fraud could exist and don’t take action to rectify the issues, they could open themselves to liability from shareholders and plan beneficiaries. The scale of damages just for fraudulent claims could be on the magnitude of lawsuits over asbestos and tobacco. A very conservative estimate of what percentage of claims are fraudulent is 5% (many believe 10%-15% is more accurate). Employers spend over $1 trillion per year on healthcare. If you take the low-end estimate (5%) and extrapolate over the statutory lookback period for ERISA (6 years), that would be $300 billion.

They use a variety of approaches, but most are relatively straightforward and focus on proven benefits-design solutions that make poor care decisions more costly and better care decisions less costly to encourage the right behavior. Most importantly, they don’t focus on shifting costs to employees. Dave’s TEDx talk focused on how this cost-shift to the middle class has devastated the American Dream and was the backdrop for the populist campaigns that were badly misreported (in terms of their root cause).

Three high-potential areas include actively managing high-cost care to move it to high-quality, lower-cost care settings; directly addressing drug costs; and incentivizing wise care decisions. Here are a few repercussions these changes for companies and public company investors.

More active management of healthcare, self-insurance, and lower costs by employers reduces revenue and margins at public insurance companies, threatening core revenue streams. This is compounded by self-insured employers moving to independent plan administrators not tied to traditional insurers.

Surprisingly, the most sustainable and high-impact of these approaches will benefit employees as well. Most wasted spending in healthcare that directly affected patients is the result of overuse, misdiagnosis, and sub-optimal treatment.

Time and again, we’ve found that the best way to slash costs is to improve health benefits

And isn’t better healthcare at a lower cost the best outcome for all of us?

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